Personal Loans are fixed amount unsecured loans that provide borrows with additional funds for just about any reason from big purchases to emergency funds. Whether you’ve fallen on hard times or need extra money to cover an expense, personal loans are a viable option for many people. Many also look for a loan when they want to consolidate debt. A personal loan can allow them to pay off many debts and only deal with one monthly payment.
Whatever category you fall into, it’s important to do your homework and know what to expect before getting a personal loan. This includes educating yourself about the types of loans out there as well as how to apply for a personal loan and how to know if it’s right for you.
Let’s start by looking at the different types of personal loans.
Types of Personal Loans
There are several different types of personal loans that you may qualify for depending on your financial situation.
Unsecured Personal Loan
An unsecured personal loan is the most common type of personal loan that you’ll find. You do not need any collateral to apply for this type of loan. To be approved, you likely need to have a high credit rating. Credit cards, personal and business loans are all examples of unsecured personal loans.
While this type of loan may sound good, it typically has a higher interest rate than a secured loan because there is no collateral.
Common examples of secured loans are home mortgages and auto loans. Secured loans require collateral and typically have lower interest rates than unsecured loans. With a mortgage, your home is collateral. If you default on payments, you run the risk of foreclosure where the bank will take possession of your home. If you default on your auto loan, the car company can repossess your vehicle.
Bad Credit Loan
This loan doesn’t have a great name because it’s not a great type of loan due to the extremely high-interest rate it usually carries with it. But, when you have bad credit, you may feel as though a bad credit loan is your only option. Before applying for a bad credit loan you may want to consider debt consolidation. This allows you to merge much of your debt into one monthly payment, typically lower than your current payments.
You can also look into ways to boost your credit score so that you can apply for an unsecured personal loan. Meeting with a financial adviser or credit counselor can help you sort out your finances and determine if there are other options available rather than a bad credit loan.
Fixed-Rate Loans and Variable-Rate Loans
When applying for a personal loan, you’ll notice that there are fixed-rate and variable-rate loans. As their names suggest, a fixed-rate loan means your rate and the monthly payment will stay the same for the life of the loan. This can work in your benefit if you’re lucky enough to lock in at a low-interest rate.
With variable-rate loans, you’re at the mercy of the banks. If they raise interest rates, your payments will go up. If they lower them, they will go down. It can be difficult to budget when you have a variable-rate loan because your monthly payment is not consistent.
Debt Consolidation Loans
This type of loan rolls multiple debts into one monthly loan payment. If you go this route, look for a debt consolidation loan with a lower interest rate than the one on the payments you’re already making. This will help you save money on interest rates and pay more on the principal. If the rate is higher, it may not be in your best interest.
A co-sign loan is reserved for people with no credit history or who do not qualify for a loan themselves. When you have someone co-sign the loan, they agree to pay back the loan if you cannot. If your co-signer has a solid credit rating, this can help you get a better interest rate on your loan.
How Do I Apply for a Personal Loan?
Once you decide which type of loan you are going to apply for, the process is fairly simple. There are many personal loans online where you can do everything right from home.
Before you fill out an application, you’ll want to do the following:
- Get a copy of your free credit report and credit score. This will give you a better idea of the type of loan you may qualify for and what rate you may be eligible for.
- Try to increase your credit score. If your credit score is low, try to increase it by paying off any large debt. This may not be an option if you don’t currently have the time or money.
- Continue to make your payments on time. You don’t want to stop paying your bills just because you’re applying for a loan. Continue to make your payments on time to increase your credit score.
Once you have these things done, you can apply for your loan. Some people go to a bank to do this in-pereson. Others will mail in an application or apply for a personal loan online. If you have a bank you do business with and have a good relationship with them, you may want to start there.
If your credit isn’t that good, you may want to opt for an online lender. If you go this route, don’t pay any money upfront for a loan during the application process. Also, be on the lookout for any fraudulent activity.
What Interest Rate Can I Expect?
Interest rates on personal loans are closely tied to your credit rating. People with a high credit rating typically can borrow larger amounts of money at lower rates. Those with poor credit are often limited to what they can borrow and have to pay higher interest rates.
According to nerdwallet.com, these are the typical rates you can expect:
Credit Score APR
These rates are purely estimates. Your actual rate may vary depending on your exact credit score and lender.
How Long Will it Take Before I Know if I’m Approved?
If you need a personal loan, chances are you want to be approved as soon as possible. If you’re applying for an unsecured loan, it may only take a couple of hours before you know if you are approved. When applying for a secured loan, the process can take up to 72 hours.
Once you are approved, you can expect to receive your loan money anywhere from 2-5 business days. Many times the money is electronically deposited into your bank account.
How Do I Avoid Getting Scammed?
Some people are skeptical about applying for personal loans online in fear they will get scammed. If the company is legitimate, there should be nothing to worry about. Here are several tips to protect yourself:
- When sending information online, look for the padlock on the website address. This will verify that the site will be sent securely to the lender.
- Look at the email’s domain. Any email correspondence should come from a trusted domain. If you notice it is coming from someone’s personal email with a Google or Yahoo-type of domain, you should be skeptical.
- Look at the site’s security certificate. If the security certificate has expired take this as a sign that something is not legitimate.
- Use common sense. If an offer seems too good to be true, then it probably is. Trusting your instincts and using common sense is important in online dealings.
If you have any reservations about an offer you’re given, it’s best to skip it and look for one that you trust one-hundred percent.
Should I Take the First Personal Loan I am Offered?
When you need money quickly, it’s tempting to take the first offer you receive. While you can certainly do this, you should think about shopping around. See what rates other lenders will offer you. Most lenders will let you see estimated rates without affecting your credit score.
If you have good or decent credit, you should be able to get low-interest rates from multiple lenders. Then it’s just your choice which one to accept.
If your credit isn’t so great, you may have to take what you can get until you’re able to increase your credit rating. When you are consistent in paying your bills on time, you’ll be able to improve your credit score. This will allow you more and better options the next time you need a personal loan.
Taking out a personal loan is not something you shouldn’t do lightly. Take your time to do your research and crunch the numbers. Often times, people will rush into accepting a loan and run into problems later on because they can’t repay it. Remember, if you don’t pay it back, you could face serious consequences. You may not only face the wrath of collection agencies calling you, but you may also face a lawsuit.
Knowing what your loan entails and the monthly payments allows you to make an educated choice. Your financial well-being may be tied to that loan. You want to be sure that you are making the right decision for your future.